Diamond World Jewellers Pty Ltd v Catlin Australia Pty Ltd [2021] NSWSC 1431 | Case summary

Diamond World Jewellers Pty Ltd v Catlin Australia Pty Ltd [2021] NSWSC 1431 | Case summary | Zoe

[2]

Conclusion

For reasons which follow I have concluded that the evidence establishes that there must be judgment for Diamond World.
Having earlier accepted liability, in October 2019 the insurer rejected Diamond World's claim, but offered to settle for $500,000 on specified terms. On its own admission the insurer had concluded that it was obliged to pay for stolen stock and damaged fittings, yet still it made no payment under the policy, for the claim it decided had been substantiated.
The insurer relied on conduct, which on its case, established Diamond World's failure to adhere to its obligation of utmost good faith, as well as the rejection of its offer, to resist any orders being made in Diamond World's favour. I am satisfied that despite the evidence establishing that Diamond World did breach that obligation, not only did the insurer breach its own obligation of utmost good faith, it also breached its contractual obligations.
That there was a dispute over whether the insurer owed Diamond World any more than the $500,000 it offered to pay, could not relieve it of its obligation to pay what Diamond World substantiated it was owed under the contract. That course was not available to the insurer under the contract, either while it sought to negotiate a resolution of the dispute, or later, while resisting the claims Diamond World advanced in these proceedings.
The evidence established that Diamond World had substantiated both its claim for the stock stolen in the robbery, as well as the damaged fittings. As to the claim in respect of the damaged stock, while it substantiated the cost price of the jewellery left behind in the smashed cabinets, it did not establish what of that jewellery had been damaged.
That was because both Diamond World's claim and what it advanced in these proceedings was that all the stock left behind had been damaged. Mr Chohaili's concession in cross examination that 30 - 40% of that stock had not been damaged, meant inevitably that Diamond World had not substantiated what stock had been damaged, as it was obliged to do under the contract. His concession established that it had in fact never attempted to establish this, with the result that the evidence which Diamond World led was also incapable of establishing this aspect of its case.
The insurer not having pleaded fraud, neither Diamond World's rejection of its $500,000 offer, nor the fact that Mr Chohaili's evidence established that part of Diamond World's claim had no basis, can relieve the insurer of its contractual obligation to pay for the loss which Diamond World did substantiate it had suffered in the robbery, given what it had insured under the policy.
It follows that there must be judgment for Diamond World.

[7]

Issues and pleadings

Before the hearing the parties agreed relevant facts, a chronology and what was in issue. The facts agreed were: "1. Diamond World Pty Ltd (Diamond World) is a family run business jewellery business, which has been in existence since 1988. Its General Manager is Khosrow Chohaili and the sole director and shareholder of Diamond World is his wife, Ziba Chohaili. 2. On 4 December 2017, there was an armed robbery at a jewellery stored operated by Diamond World in Bankstown (the Shop). 3. During the robbery armed thieves smashed the glass in 6 free standing glass display cabinets on the Shop floor (the Floor Cabinets) with hammers and removed an amount of the jewellery from them (the Stolen Stock). 4. Diamond World asserts that the jewellery that remained in the Floor Cabinets was damaged by the thieves during the robbery, in that it was dented or scratched by the implements used to break the glass and the glass itself which was shattered and contaminated by blood lost by the robbers (Damaged Stock). 5. The Shop also had jewellery in 8 cabinets attached to the walls, as well as in the front window. No jewellery was removed from these areas. 6. Diamond World was insured in respect of perils for its stock of jewellery, precious metals and stones. The Policy was entered on 16 December 2016 and consisted of: (a) Proposal Form dated 28 November 2016; (b) Schedule of Insurance dated 16 December 2016; and (c) JB03(01-150) Policy Form. 7. On 5 December 2017 Diamond World notified the Insurer of the robbery and lodged a claim on 20 December 2017. 8. Over 20 months, in support of the claim, and in response to the Insurer's requests for information to support the claim, Diamond World provided to the Insurer its records, including: (a) a stocktake list of Diamond World's stock on hand as at 30 June 2017 (2017 stocktake); (b) the sales records maintained by Diamond World which included: (i) daily handwritten records of sales, which were kept in a book and consisted of a list of items sold with a brief description and price; (ii) EFTPOS payment records for sales paid for by that method; (iii) cash bank deposit records for sales paid for by cash; and quarterly BAS returns. 9. The Insurer investigated the claim. During those investigations, the Insurer sought and received the business records of Diamond World. 10. The NSW Police caught and prosecuted the robbers. They have been sentenced. Save for a small amount of jewellery to a value of $2,892.55 recovered by the NSW Police, the Stolen Stock has not been returned to Diamond World. 11. Diamond World asserts that it melted down the Damaged Stock on 18 March 2018."
The issues then identified were: "1. What is the value of the Stolen Stock? 2. What is the value of the Damaged Stock? 3. Has the Insurer made a decision? 4. If so, was the Insurer entitled to limit Diamond World's claim by reason of the "limited information and evidence" as to the Stock having regard to the Stock Records Clause? 5. Has Diamond World engaged in the conduct particularised in [19] of the Amended Defence? 6. If so, does that mean that Diamond World has not "approached the matter in good faith and presented a claim which is not a true reflection of its entitlements under the Policy"; 7. If so, does that mean the Insurer is entitled to refuse the "whole of the claim"?
Before the hearing the parties had filed and served written outlines of their submissions. They and the insurer's oral submissions in opening resulted in both the identified issues and the pleadings being revisited. As a result, on the second day of the hearing an application for leave to file a reply to the defence was also made and opposed, which I eventually refused.
This application was explained by an affidavit sworn by Diamond World's solicitor, Mr Tassell, on 12 October. He there explained that it had been triggered by:

his understanding that the defence did not plead that a decision had been made to decline Diamond World's claim;
that on the first morning of the hearing a tender bundle containing a 3 October 2019 without prejudice letter, other privileged communications and a report which the insurer had received, the existence of which had not previously been disclosed, had been served. There had also been no prior notice given that it was proposed to rely upon these documents, or to waive privilege in them;
the insurer's opening then disclosing that a decision to reject Diamond World's claim had been made, which it was claimed had been communicated by the 3 October 2019 letter; and
the insurer later providing a revised issues list, which amongst other things raised for the first time an issue as to whether it had made "a decision constituted within" the 3 October letter and whether its decision was fair or reasonable.

I nevertheless concluded that the leave sought should be refused, being satisfied that the parties' pleadings already sufficiently raised the question of whether the insurer was in breach of its obligations to Diamond World and the insurer acknowledging that no pleading point would be taken from the absence of the proposed reply.
I reached this conclusion because the amended statement of claim pleaded, in relation to breach of the contract: "20. The Defendant hasve refused to provide cover for the Stolen Stock and the Damaged Stock on the basis of Cost Price, including tax where applicable, or at all. 21. In the circumstances pleaded, the Defendants have breached the Policy. 22. As a result of the Defendant'ss' breach, the Plaintiff has suffered loss and damage. Particulars (i) The value of the Stolen Stock on a "Cost Price" basis. (ii) The value of the Damaged Stock on a "Cost Price" basis." 23. Further, and in the alternative, the Defendant& hasve sought to negotiate a payment of the claim. Particulars (i) Letter Lander & Rogers to PVL 18 July 2019 (ii) Letter PVL to Lander & Rogers 8 August 2019 (iii) Letter Lander & Rogers to PVL 3 October 2019 (iv) Letter PVL to Lander & Rogers 10 October 2019 24. In doing so, the Defendant& hasve sought to rely on the absence of information as a basis on which to reduce the amount payable by the Defendant. 25. To the extent that the Defendants relies y on this failure the Defendants is are in breach of the Policy in that: (a) the Defendants is are not entitled to the information requested; and (b) the Defendants knew, or ought to have known, that the Plaintiff did not keep such information at the time the parties entered into the Policy. 26. In the circumstances, the Plaintiff has suffered loss and damage. Particulars (i) The Plaintiff repeats the particulars pleaded in paragraph 2 above less the amount the Defendant& are otherwise willing to pay."
The amended defence pleaded: "14. As to paragraph 20 of the amended statement of claim, the defendant: (a) says that it has offered to pay to the plaintiff an amount in excess of the value of loss that the defendant has assessed the plaintiff is entitled to under the Policy; and (b) otherwise denies the paragraph. Particulars Lander & Rogers's letter to Pikes and Verekers Lawyers dated 18 July 2019 Lander & Rogers's letter to Pikes and Verekers Lawyers dated 3 October 2019 15. As to paragraph 21 of the amended statement of claim, the defendant: (a) repeats paragraph 14 above; and (b) otherwise denies the paragraph. 16. As to paragraph 22 to 24 (inclusive) of the amended statement of claim, the defendant: (a) repeats paragraphs 14 and 15 above; and (b) otherwise denies the paragraphs. 17. As to paragraph 25 of the amended statement of claim, the defendant: (a) says that it was a term of the Policy that the plaintiff provide it with all available information, including documentary evidence, whether it be official or unofficial, of all purchases, sales and other transactions of insured stock to enable it to quantify the amount of loss claimed; (b) says that it was a term of the Policy that the plaintiff provide it with such information and evidence as to the property lost or damaged as the defendant may reasonable require and as may be in the plaintiffs power; and (c) otherwise denies the paragraph. Particulars Stock Records Clause, Conditions Applicable to Sections 1, 2 and 3 of the Policy Information in Event of Loss Clause, Conditions Applicable to Sections 1, 2 and 3 of the Policy 18. As to paragraph 26 of the amended statement of claim the defendant: (a) admits that the plaintiff is entitled to the value of loss that the defendant has assessed that the plaintiff is entitled to under the Policy, being $326,920 $367,990 .78; and (b) otherwise denies that the plaintiff is entitled to the relief sought or any relief at all. 19. In further answer to the whole of the claim made by the plaintiff, the defendant says: (a) any claim based upon a breach by the defendant of the contract of insurance; and (b) any claim for damages over and above the assessment of the loss made by the defendant; must fail because the plaintiff has not approached the matter in good faith and has presented a claim which is not a true reflection of its entitlements under the Policy. Particulars (a) During the period of the assessment of the claim the plaintiff failed to respond fully and promptly to reasonable requests for information made by the defendant; (b) The plaintiff has claimed for the loss or destruction of items of jewellery which, upon the basis of the records of the plaintiff and third parties supplied to the defendant, cannot be established to have been taken during the robbery or damaged as a result of the robbery: (c) In response to the defendant's request that it properly prove its claim, the plaintiff has: (i) failed to produce records verifying the consignment of jewellery kept on the subject premises and taken in the robbery; (ii) produced records which neither conform with proper accounting processes or provide a proper means of recording stock, sales and purchases; (iii) produced and relied upon records which do not appear to be an accurate record of the jewellery on the premises as at the date of the robbery. (d) The plaintiff has purported to support the claims by relying upon representations and providing written statements which do not accurately reflect the loss and damage suffered through the robbery: (e) The plaintiff has undertaken measures in respect of unnecessarily dismantling and melting jewellery settings which had the effect of artificially enlarging the potential claim."

[9]

The parties' cases

The insurer contended that the records which Diamond World had maintained were incomplete and unsatisfactory and the claim advanced "false, exaggerated, unsubstantiated and tendentious". Its case was that Diamond World was obliged to keep proper records, which it had failed to do, cll 1 and 4 of the contract relevantly defining: "the parties' obligations and the nature and extent of the indemnity. There are three steps: • The combined effect of the two clauses is to cast an obligation upon the insured to keep the appropriate records which, in the event of a claim, could satisfactorily substantiate a claim. The burden or onus lies upon the insured, not the insurer. • An entitlement to any payment under the indemnity only arises when those conditions have been fulfilled by the insured. • The quantification of the payment to be made under the indemnity only covers loss or damage which is satisfactorily substantiated."
Further, that cl 1 required Diamond World to provide all information which it had about its claim. That, it had also failed to do.
It was also contended that a decision as to whether an insured has satisfactorily discharged these burdens was a matter for the insurer and that if a claim is accepted, it is a matter for the insurer to determine the extent to which the claim has been satisfactorily substantiated. In making that decision the insurer must act reasonably, in accordance with the parties' bilateral duty of good faith. But compliance with the requirements of these two clauses was a condition precedent to liability.
In this case Diamond World's records were so scanty and poorly kept, that it was doubtful that there had been compliance with the condition precedent.
While accepting that it had the obligation to substantiate its claim, Diamond World did not accept that these clauses imposed an obligation to keep "proper records", or any requirement to provide "all information" about its claim. The obligation imposed in that regard was narrower.

[10]

The contractual provisions

In the 2016 proposal form advice was given that Diamond World's last stock take had been undertaken in June 2016; that Diamond World did not keep "proper records of all sales, purchase transactions, approvals, inward and outward entrustments"; and that it did not use "electronic equipment/microprocessors/ computers" in its recording system. Still cover was provided.
The proposal warned, however that "policy conditions may preclude your rights to indemnity if proper records are not kept." The term "proper records" was not defined nor dealt with in the policy.
The proposal disclosed the value of goods and stock held on consignment usually kept in the shop and Diamond World's office, as well as peak season stock increases.
The certificate of insurance specified that in return for payment of the premium, the insurer had agreed to insure Diamond World in accordance with the wording attached to the certificate. All risks of physical loss and/or damage were thereby insured, including goods held on trust and at the premises, in the event of robbery. The basis of valuation of such stock was specified to be "at Cost Price, including tax where applicable".
The general conditions of the policy required claims to be made in writing: cl 6. The conditions applicable to sections 1, 2 and 3 of the policy, which dealt with the stock covered, contents covered and damage to premises by thieves, provided in cll 1 and 4 : "1. STOCK RECORDS CLAUSE: It is a condition under this insurance that in the event of a claim being made under this policy, the Insured shall provide Underwriters or their representatives with all available information including documentary evidence, whether these be official or unofficial, of all purchases, sales and other transactions of insured stock. This information will be utilized by Underwriters or their representatives to assist in quantifying the amount of loss claimed. In the event that information provided does not satisfactorily substantiate the quantum claimed, Underwriters shall be liable only for the amount of claim accounted for. Any settlement beyond this figure shall be solely at the discretion of Underwriters, unless otherwise endorsed herein 4. INFORMATION IN EVENT OF LOSS: The Insured shall in case of loss or damage and as a condition precedent to any right of indemnification in respect thereof, give to the Underwriters such information and evidence as to the property lost or damaged and the circumstances of the loss or damage as the Underwriters may reasonably require and as may be in the insured's power."
I am satisfied that the insurer's construction of the policy cannot be accepted, given all these provisions.
Had the insurer wished to impose an obligation on Diamond World to keep "proper records", that had to be done expressly. That was not achieved by the words used in these clauses, or elsewhere in the policy. To the contrary, that the proposal disclosed that "proper records" were not kept, does not accord with these clauses, or the policy as a whole, being read as if such an obligation was imposed.
Certainly, the insurer was only obliged to pay for loss or damage which Diamond World substantiated. It thus had to ensure that it had the capacity to do so, by the records which it kept, failing which it risked its claim not being accepted as having been substantiated. But neither separately nor together did clauses 1 and 4 impose a positive obligation on Diamond World to keep "proper records", an undefined term to which no reference was made in either clause.
Rather, cl 1 must be read as requiring Diamond World, when advancing a claim, to provide the insurer with all available information which it had, "of all purchases, sales and other transactions of insured stock", including documentary evidence, "whether official or unofficial".
Under cl 4 Diamond World was also required to give such further information and evidence as to the property the subject of the claim, which the insurer might reasonably require. If cl 1 already truly required the provision of "all information" which Diamond World had about its claim, cl 4 would have had no work to do.
In opening oral submissions, it was also argued for the insurer to be relevant that Diamond World had not provided information to the insurer at the appropriate time. These clauses envisaged, however, the process of investigation which the insurer pursued, before coming to its conclusions.
I will return to the question of whether the insurer adhered to its obligation to act reasonably, on the information which it had at the time it made its October 2019 decision.
Given Mr Chohaili's concession, it must be accepted that what Diamond World failed to disclose, as it should have, was that not all the stock left behind in the smashed cabinets had been damaged. When it made its October 2019 decision the insurer also did not have, for example, the report of Diamond World's expert, Mr Beames, the further report Mr Ehlers provided as a result, or the experts' joint report. The insurer thus did not have all the evidence led in these proceedings, before it communicated its October 2019 decision, which must be borne in mind.
But that other, pertinent information came to its attention after it made its decision did not preclude the insurer from revisiting that decision, especially given the ongoing negotiations being pursued. Importantly, Mr Beames' report led the insurer to have Mr Ehlers review the advice he had given in his first report. He thus accepted that it contained errors, some of which were apparent on the face of the report, to which I will return.
The joint report, which it was also open to the insurer to consider, shed even further light on the problems with Mr Ehlers' first report and the concerns it had raised about Diamond World's systems and records. In these proceedings that became relevant to the attack on the credibility and reliability of Mr Chohaili's evidence and Diamond World's records.

[11]

Did Diamond World adhere to the obligations which flowed from clauses 1 and 4?

With the one important exception I have identified, the evidence establishes that with the assistance, initially of Mr Leigh and later its lawyers, Diamond World adhered to the obligations imposed by these clauses.
Diamond World provided explanations of both its anticipated and actual claim, which it revised after discussions with the insurer. It also provided supporting documentation for its claim and other information which the insurer sought, including the analysis undertaken of its records, SS1, which Mr Crofton had requested after police photographs of the smashed cabinets were obtained. They supported the claim in relation to stolen and damaged stock.
The records of Diamond World's 2017 stocktake; sales invoices by which it acquired stock; consignment notes under which consigned goods came into its possession; sales invoices which it issued when stock was sold; banking records which evidenced cash and other payments which it received in respect of such sales; and tax and accounting records were all provided. As was an array of other information which the insurer sought when Mr Chohaili, Mr Pal and Mr Rad, whose company, Empire SER, had consigned stock were interviewed.
Diamond World engaged Mr Beames to respond to Mr Ehlers report, after it had advised the insurer of the errors it contained. They included that there had been no 2017 stocktake undertaken, which was simply wrong, as Mr Crofton and the insurer were long aware. Diamond World was not provided with the report the insurer obtained from its investigator, Ms Bramble, and so had no opportunity to advise the insurer of errors which it contained, some of which would have also been apparent, particularly to Mr Crofton.
In cross examination Mr Crofton said that he was aware of the paper-based system which Diamond World used. Despite the issue over what, if anything had been disclosed and agreed in relation to damaged stock, he also agreed that he had not suggested in his affidavit that Diamond World had not responded to any of the requests it received for production of further documents or information and that he had consulted with Mr Ehlers and Ms Bramble, about what should be sought.
What the insurer could not reasonably require under this contract was the production of financial records which did not exist, because they did not form part of Diamond World's system. Notwithstanding that they would have been kept, had some other method of record keeping been maintained by Diamond World.
Given the system of record keeping which it did maintain, by which it had successfully operated its business for decades in compliance with legal obligations which it had to meet, it would not have been reasonable for their production to be required by the insurer.
This is relevant because Diamond World, for example, identified documents the insurer sought, such as monthly stocktakes, which it did not undertake. Requiring such documentation was not reasonable. Explaining why it could not be produced and repeatedly offering to provide more information, if it was sought and doing so, when it was pursued, if that was possible, was reasonable.
It is thus pertinent that in cross examination Mr Crofton not only agreed that the information Diamond World had so provided was sufficient for him to have assessed its claim, but that his evidence did not disclose what he concluded.
I will return to this. But I am satisfied that the evidence establishes Diamond World's adherence to the obligations imposed upon it by cll 1 and 4 of the insurance contract, other than in relation to the jewellery which was not damaged in the robbery, to which I will also return.

[13]

Mr Chohaili

The insurer put in issue the credibility and reliability of Mr Chohaili's evidence, having cross-examined him for over 2 days, at times on a basis which was inconsistent with what documents and Mr Crofton's evidence established. For example, about when various records were first provided to the insurer, including the June 2017 stocktake. That was provided soon after the claim was advised.
He was also cross examined at times as if his answers were not responsive or coherent. They were. For example his explanation that while the same amount of gold might be recovered if two pieces of jewellery were melted, the resulting loss in the case of the undamaged piece of jewellery would be greater, because the value of the damaged piece of jewellery had already been reduced by the damage.
The insurer's case in opening was that the claimed loss could only be substantiated if Mr Chohaili was completely accepted, which he could not be, because some of Diamond World's loss was the result of his own conduct. In closing, despite concessions which he properly made against Diamond World's interests, it was also argued that Mr Chohaili's evidence would not be accepted, absent corroboration. In closing it was argued that his evidence even called into question the reliability of Diamond World's records.
I am unable to accept these submissions.
First, a great deal of Mr Chohaili's evidence was corroborated. Not only by documents, but also by the evidence of Mr Rad, Mr Crofton and of the experts. Secondly, while Diamond World certainly has the onus of establishing its case, that does not depend on the complete acceptance of all of Mr Chohaili's evidence. Thirdly, the concessions which Mr Chohaili made support the acceptance of his evidence on contentious matters, as does the absence of evidence called from Mr Leigh. Fourthly, the insurer's admissions and that no claim of fraud was advanced, is also relevant. Fifthly, attention must also be paid to Mr Chohaili's difficult personal circumstances. Lastly, the reliability of Diamond World's records was established by the expert evidence.

[15]

No allegation of fraud

In assessing Mr Chohaili's evidence it is also relevant that having thoroughly investigated the claim as it did, the insurer not only admitted that Diamond World had suffered a loss, but that it did not allege any fraud.
That reflected what the considerable information it had to consider established. Not only the documents and information Diamond World provided, but what it received from Mr Crofton, Ms Bramble and Mr Ehlers, not all of which was disclosed to Diamond World, before the October 2019 decision was made.
The information which the insurer had from the outset, however, was not only that jewellery had been stolen from the store, but that other jewellery had been damaged.
That some of it had been damaged was not only established by the items of jewellery which the robbers dropped, which Mr Crofton accepted had been damaged, but also the inevitable conclusion which flowed from discussions of damaged stock between Mr Leigh and Mr Crofton and the initial written advice of the claim in December 2017. Then express advice of a claim in relation to damaged stock was not only given, but information as to the value of gold which the insurer was likely to be credited, after the jewellery was damaged, was provided and later clarified.
That advice accorded with what the police photos later obtained showed. Namely, a deal of jewellery left behind in the smashed cabinets which had been showered by shards of heavy glass created by the hammers used to smash the glass tops of the cabinets, as well as by drops of blood. One of the hammers had also been left behind in one of the cabinets. The only available conclusion from those photos was that at least some of that stock left behind had been damaged.
That helps explain why the insurer did not plead fraud.
Mr Chohaili's evidence was that before the December advice was given, he had shown some of the damaged jewellery to Mr Leigh. While that was disputed by Mr Leigh, it accorded with the file note Mr Crofton kept and the December advice.
What was insured was the cost price of the jewellery. Mr Chohaili explained in cross examination that the price for which jewellery could be sold depended not only on its wholesale cost, that reflecting the value of the gold and stones used and the labour involved in its manufacture, as Mr Crofton agreed in his cross examination. Thus, while some jewellery could be sold at retail for only twice its cost price, more valuable jewellery, handmade using higher quality gold and more valuable diamonds, could command up to five times its cost.
Further, that damage affected the value of the jewellery, so that it could not be sold at such prices. But the gold and some stones, depending on their size, could be re-used, because they could be removed before the gold was melted. Some of the gold would also be lost during the melt and very small diamonds which could not be removed would not be able to be reused, because of damage which resulted from the melt.
On that evidence, selling an undamaged piece of jewellery would thus have resulted in a greater return to Diamond World, than making an insurance claim for its cost price, less the value of the gold melted and any stones recovered before the melt.
Mr Chohaili's concessions established that the spreadsheet SS1 and its later revisions, by which Diamond World's claim was advanced, included undamaged jewellery. That was because he had treated all the jewellery left behind in the smashed cabinets as if it had been damaged, with the result that he had melted all of it, thereby destroying the value of the undamaged stock. What he did was inexplicable.
His only explanation was that he had proceeded in accordance with his understanding of the agreement reached between Mr Leigh and Mr Crofton, which was in issue.
There were also questions about the date of the melt, when the metal was sent to the refiners, as well as the weight of the metal and stones recovered, which led to the insurer's submission, in final written submissions, that there were reasons to doubt "that the melt occurred in the circumstances described by Mr Chohaili".
In final written submissions it was also said that the insurer did not concede that the melt had occurred. In final oral submissions it was argued that on the evidence it would be open to conclude that Mr Chohaili's purpose, when he melted the jewellery, could have been to destroy evidence. Those submissions have to be understood in a context where he was then a witness to be called in the prosecution being pursued against the robbers, as well as a likely witness if proceedings such as this had to be pursued against the insurer, given that he was Diamond World's controlling mind.
It followed that like questions in cross examination to which objection was successfully taken, because the insurer had not pleaded fraud, that was a case I was satisfied was not open to the insurer so to advance.
As explained in TAL Life Ltd v Shuetrim (2016) 91 NSWLR 439; [2016] NSWCA 68 at [51], the insurer had to act reasonably in arriving at its decisions. That explains why it did not reject the claim for fraud. The conclusion it had arrived at was that the claim had been overstated and unsubstantiated, but on 31 May 2019 it accepted that a payment had to be made under the policy. Consistent with this decision, it did not plead fraud in these proceedings and admitted what it had concluded Diamond World was owed under the policy.
The insurer's decisions must be understood in the context of s 56 of the Insurance Contracts Act 1984 (Cth) which permits, in the case of a claim made fraudulently, an insurer to refuse to pay the claim: s 56(1).
Had fraud been pleaded it would have been for the insurer to establish: Wallaby Grip Limited v QBE Insurance (Australia) Limited 240 CLR 444; [2010] HCA 9 at [36]. Further, particulars of any claimed fraud would have also had to be given, as r 14.14 and 15.3 of the Uniform Civil Procedure Rules 2005 (NSW) require: Sgro v Australian Associated Motor Insurers Ltd [2015] NSWCA 262 at [55]-[57].
This is because a "finding of fraud, including fraud for the purposes of s 56, involves a finding that a person has been untruthful and deliberately so, with the intent of obtaining a financial gain." Thus, "it is a finding of seriously wrong conduct": at [57]. Procedural justice therefore not only requires that a person be fairly confronted with the suggestion of fraud at trial, but that it also be clearly pleaded and properly particularised beforehand. Such a pleading must allege not only the acts involved, but that they were done in a manner that involves fraud: Banque Commerciale SA v Akhil Holdings Ltd 169 CLR 279; [1990] HCA 11 at 285 and Sgro at [55].
Similar conclusions were earlier arrived at in Nadinic v Drinkwater (2017) 94 NSWLR 518; [2017] NSWCA 114 at [45]-[46], where reference was made to Forrest v Australian Securities and Investments Commission (2012) 247 CLR 486; [2012] HCA 39 at [25]-[26]. There it was observed that a case of fraud cannot be a "fall back" claim, it must be pleaded specifically and with particularity.
In the result, in resisting Diamond World's case the insurer was not entitled to press its defence at trial on the basis that in making or pursuing its claim, Diamond World had engaged in conduct which involved unpleaded fraud.
To resist the objection to questions in cross-examination which suggested fraud, the insurer relied on what was discussed in 3WJ Pty Ltd & Anor v Kanj [2008] NSWCA 321. There it was observed that dishonesty of a witness testifying in support of a cause of action or defence in which dishonesty in any form is not an element, is not a material fact that has to be pleaded. Further, that "where fraud is neither an element of the claim nor a defence, the fraudulent or otherwise dishonest giving of evidence "is not a pleadable matter": at [12].
But if a party wishes to contend that a witness has "given fraudulent or otherwise dishonest testimony", that the honesty of the witness's testimony is a real issue in the trial must be revealed at the appropriate time and the witness "fairly confronted with the allegations in question": at [12]. That occurred in relation to the credibility and reliability of Mr Chohaili's evidence, when at various times it was fairly put to him that his evidence was not true.
But fraudulent conduct in pursuit of an insurance claim is different. Such conduct does not fall within the type of "capricious or unreasonable conduct which falls short of dishonesty", which the pleaded concept of utmost good faith encompasses: TAL Life at [49]. As held in Sgro, if it is fraud which is to be relied on as part of a defence to a claim such as this, it is incumbent on the defendant to plead and particularise the fraud alleged, in answer to the claim.
The result was that objections to questions which sought to establish that Mr Chohaili had acted fraudulently in the pursuit of Diamond World's claim, had to be upheld because an unpleaded case of fraud could not be so advanced. Further, had that conclusion not been arrived at, s128 of the Evidence Act 1995 (NSW) would also have been engaged, it requiring as it does that a witness be given the opportunity to object to questions on the basis of self-incrimination.
Mr Chohaili's concessions established that he made a very serious mistake when he melted the undamaged jewellery, treating all of the stock left behind in the smashed cabinets as if it had been damaged, for which Diamond World has already paid dearly. Had that jewellery not been melted, as I consider must be accepted on the evidence, with the result that Diamond World would then, contrary to Mr Chohaili's evidence, have had the undamaged jewellery still to sell despite its insurance claim, that would have involved very serious fraud.
But that was neither pleaded, nor supported by the evidence and so needs no further consideration.
This also supports the conclusion that while Mr Chohaili's concessions established that the claim advanced by Diamond World in relation to the undamaged jewellery had in part no basis, it still did not necessarily follow that Mr Chohaili was a witness whose evidence was neither credible nor reliable and could not be accepted, on matters which remained in issue.

[16]

Irrationality

In resolving this issue, account must also be taken of the fact that what Mr Chohaili did was not rational, as was put to him in cross examination and he accepted. It could also have been dishonest, but of that I am not convinced. The evidence certainly did not establish that Mr Chohaili attempted to deceive Mr Maher, Mr Leigh and Mr Crofton about jewellery having been left behind in the smashed cabinets, as the insurer submitted. On the evidence, such a deceit would have been entirely out of character, given both Mr Chohaili's long, successful operation of its business and Diamond World's insurance history.
In any event, consistent with Mr Chohaili knowing from his presence at the store on the night after the robbery, that both his own photographs and those taken by police depicted that jewellery, he discussed the damaged jewellery with Mr Leigh and it was dealt with in the December advice.
Mr Chohaili's understanding from Mr Leigh was that it had been agreed with Mr Crofton that the value of the damaged stock for which the insurer had to be given credit, given that the gold could be reused, was to be established by the gold being melted. This was also denied by Mr Crofton, but there were problems with his evidence, to which I will return.
Mr Chohaili's inexplicable mistake was to act on that understanding in relation to the undamaged jewellery left behind in the smashed cabinets.
The December 2017 advice provided to the insurer by Mr Leigh, who was not called to give evidence by either party, disclosed the expected return from melting the gold of the jewellery identified as having been damaged.
On Mr Chohaili's evidence this advice was the result of a weighing exercise undertaken by him and Mr Pal, including of the jewellery left behind in the smashed cabinets, in which Mr Leigh was also involved for some time. Other stock was also counted and a summary of cost prices made. The December advice thus included an estimate for damaged stock with a gold price of $48,681 and a melt price of $35,956, with a resulting loss of $12,716. The cost price of that stock, whether purchased from a wholesaler or held on consignment, was not there specified, because it was at that point not known.
The December advice was thus consistent with Mr Leigh having been shown some of the damaged jewellery, which he later denied, as was a file note Mr Crofton made, to which I will return.
The cost price of both the stolen stock and that left behind in the smashed cabinets was provided in 2018 by way of the spreadsheet, SS1, which contained an itemised list of all the jewellery the subject of the claim. But what neither the December advice nor SS1 revealed was that Mr Chohaili was treating all the jewellery left behind in the smashed cabinets as if it had been damaged. He later melted all of it, even though some of it was held on consignment.
But stock which was neither stolen nor damaged in the robbery was not covered by the policy. As Mr Chohaili accepted, it was thus quite irrational for him to have melted undamaged stock as he did, thereby destroying most of its value. Diamond World had nothing thereby to gain and much to lose.
The pursuit of the claim in respect of the undamaged jewellery did not accord with Diamond World's obligations of good faith. But when cross examined, Mr Chohaili adhered to his oath, not only accepting that not all the stock had been damaged, but that melting the undamaged stock had been irrational. Diamond World has thereby been left in a much worse position than it would have been, had it not been melted.
The irrationality of Mr Chohaili's actions, as the insurer put to him, as well as the detriment which Diamond World suffered as a result was thereby well established. That is a situation which I accept, must be considered in the context of what other relevant evidence established about the circumstances in which he made his mistakes.

[17]

Mr Chohaili's circumstances

Also necessary to take into account in arriving at conclusions about the consequences of Mr Chohaili's irrational actions for the credibility and reliability of his evidence, is that he was under considerable personal pressure at the time of the robbery. That was why Mr Leigh was engaged, on advice he had sought from a broker. As it turned out Mr Leigh did not act in Diamond World's interests, but rather what he seems to have perceived his own interests to be.
Mr Chohaili was the general manager of Diamond World and Mrs Chohaili its sole shareholder. By the time of the robbery, it was operating only one retail store which was due to be closed and relocated, because of the renovation of the centre where it was located. It was then having a closing down sale. Mr Chohaili was also the general manager of Fine Star, the wholesale jewellery business which he and Mrs Chohaili also operated. It supplied Diamond World with much of its stock, as well as supplying other Australian retailers.
On the evidence, both businesses had operated successfully for decades and Mr Chohaili also became a successful property developer.
Mrs Chohaili worked in Diamond World's store and kept its daily sales records, but she was not working there on the day of the robbery. Still she was so adversely affected that she was later hospitalised, having lost her sight in one eye. The two shop assistants involved in the robbery were also hospitalised. That Mr Chohaili was also adversely affected by these and other events in his life at the time, must be accepted.
Mr Chohaili was born in Iran. His family were members of a religious minority persecuted in Iran, the Mandeans. They had for generations worked there as jewellers, because of restrictions which flowed from their infidel status. From age 9 his father had trained him as a jeweller and from age 15 he had to work to support his family, as the eldest of six children, after his father left the family.
In 1987 Mr and Mrs Chohaili migrated to Australia from Qatar. His mother lived with them until her death on 26 November 2017, not long before the robbery, apart from a year when she went into care, suffering severely from dementia. Mr Chohaili's mother died at their home, the family for some three weeks beforehand having there pursued intense religious commitments which it is unnecessary to describe, which precede the death of a Mandean. A labour-intensive post mourning period had just finished when the robbery occurred, at a time when Mr Chohaili was still extremely distressed by his mother's dying. This was why Mr Leigh was engaged.
When Mr and Mrs Chohaili attended the shop, police were there with one staff member and the other was elsewhere being interviewed. They waited outside while police undertook forensic examinations and photographed the shop. Mr Chohaili also took photographs when they gained access and the next day they cleaned the shop, after obtaining advice from their broker.
It was on 6 December 2017 that Mr Chohaili and Mr Leigh met with Mr Crofton. They did not see the store before it was cleaned. It was after this meeting that Mr Chohaili examined the stock and discussed with Mr Leigh how the damaged stock was to be valued. It was from then on that he treated all the stock left behind in the smashed cabinets as if it had been damaged, making no attempt even to clean the stock which had been contaminated by blood. That he was considerably distressed when he made and acted on this decision, which until he gave his evidence was not revealed, must be accepted.
In his affidavit Mr Chohaili said that he had examined that stock using his jewellers' loop and then formed the view that it was no longer saleable as jewellery. Mr Chohaili's only explanation for what he did with the undamaged jewellery was his understanding that this is what had been agreed with the insurer in relation to the damaged jewellery.
That was only explicable by the consequences of all of the matters Mr Chohaili then had to deal with, including what unfolded in relation to the pursuit of the claim, which ultimately led to Mr Leigh being dismissed and the insurer not accepting the advice Mr Crofton gave in February 2018, after the police photographs had come to light. His advice was that Diamond World had suffered a considerable loss and should be made a part payment of $500,000.

[18]

The expert evidence

The expert evidence and the pleaded admission as to what had been substantiated precluded acceptance of the submission made in opening written submissions, that Diamond World's records were incomplete, making accuracy impossible, with the result that Diamond World needed "to rely heavily - or even only - upon the strength of the recollection of Mr Chohaili". Nor did they make it impossible to reconcile the claim in relation to consigned goods with known facts.
That made the experts' evidence relevant to the reliability of Mr Chohaili's evidence and through him, the reliability of Diamond World's records.
Mr Beames' evidence established the reliability of the records. His evidence included that there is no accounting standard which required Diamond World to maintain a perpetual inventory system, which would have involved the keeping of some of the types of records which the insurer sought during its investigation and it could not provide.
Its records were commensurate with Mr Beames' expectations for a business of Diamond World's size and nature. Its physical or periodic inventory system was one which many small, medium and large businesses adopt, doing stock takes annually, quarterly, half yearly or monthly and adding purchases, less closing stock to arrive at a calculation of cost of goods sold. This had permitted a roll forward inventory from June to December 2017.
Mr Ehlers did not disagree with any of this evidence.
In coming to his conclusions about the reliability of Diamond World's records, Mr Beames had considered the MYOB general ledger system maintained, as well as its tax and other records, undertaking a "deep dive" into its stock systems, business practices and protocols, relationships with suppliers, as well as banking and tax records.
Mr Beames had also accessed the Fine Star Diamonds MYOB general ledger system, he explained, because ordinarily consignment history is not recorded in financial records until it is converted into a tax invoice, in order to understand margins, benchmarks and consistency, quality and timeliness of information. That was relevant because of Mr Chohaili's involvement in the cost price of stock which Fine Star had sold or consigned to Diamond World and the records which it kept.
Mr Ehlers explained why he had not initially accessed this information. In February 2019 he had attended a meeting where there had been an open discussion about what documents were needed for Diamond World to sufficiently support its claim. The documents sought had been identified in a list sent in an email by Mr Crofton, into which he had had input.
The result of what had been sought and provided was that Mr Ehlers had approached his report from a different angle, using Diamond World's BAS and tax statements, MYOB information not having been sought. Mr Ehlers also explained that in insurance claims, insureds rarely gave that level of access, so that Mr Beames' investigation had gone further than that which he had undertaken.
Mr Beames also explained the robust review which he had undertaken and how he had compared what he found to industry benchmarks. He had assessed consistency of Diamond World's gross margin percentages delivered in the three years ending 30 June 2017; considered documents which supported its BAS statements; reconciled cash receipts with EFT and cash receipts and tax records, as well as reconciling its GST accounting. He also noted that there had also been an ATO review, which had found that no risk issues or risk factors had been identified.
Mr Beames had also compared what the SS1 spreadsheets dealt with and assessed that, relative to what he had seen in other businesses of similar size and larger. His conclusion was that Diamond World had complied with everything he would expect in its business and that the preparation of the spreadsheets had been possible because of the breadth and depth of its financial records, not despite them.
Mr Ehlers' observation had been that SS1 could only be created through reliance on Mr Chohaili and his memory in terms of the identification of individual items. Mr Beames explained that despite this, SS1 reflected known sales for a given period after a stock take, which reduced inventory. Thus, the ability to identify a particular item was less relevant to establishing inventory balance of non-consigned stock.
Mr Beames also explained that SS1 had adopted elements of a perpetual inventory system, rather than the periodic system which Diamond World had utilised. Both he and Mr Ehlers had reviewed that spreadsheet, his analysis tracing back the stock to supporting documents, asking questions of Mr Chohaili, when he had them, about the description of a number of items. He had also spoken to the accountant Mr Pal and had subjected all information provided to his professional scepticism and judgment. Mr Ehlers agreed with the adoption of that approach.
Mr Beames also explained that he had not observed any evidence to suggest that inventory was not on hand as at 3 December 2017, or that stock recorded in the November 2017 Empire SER tax invoice was not then in the shop. His review had reflected MYOB sales revenue which he had concluded was correct, having applied historical average industry benchmarks. The critical issue with SS1 being whether there was a decrease for the cost of sales associated with sales transactions.
Importantly, the experts also agreed that Diamond World's records supported an inventory balance of $1,406,623 as at 1 July 2017, when the stocktake of which Mr Ehlers was not made aware by the insurer, was undertaken. The records also established subsequent purchases, consignments and sales.
It follows that while at the time that the insurer made its October 2019 decision it did not have Mr Beames' report, Mr Ehlers second report or the joint report to consider, it did have the material by which Diamond World sought to substantiate its claim.
In the result, I am satisfied that the reliability of the records by which Diamond World sought to substantiate its claim must be accepted and that the challenge to their reliability, because of Mr Chohaili's involvement in their production, cannot be accepted.
It is also here convenient to deal with an issue in relation to how GST was dealt with in Empire SER and Fine Star consignment notes. The insurer's case that that the notes should not have made provision for GST. This was not raised with the experts, but Mr Rad was cross examined about it. His evidence, that Empire SER had to pay GST if the stock was sold was unremarkable. Consistent with this was his practice of indicating on the consignment note the total price which it would have to be paid, including GST in the event of a sale. Fine Star had a similar practice.
Contrary to the insurer's submission, when cross examined Mr Rad did have an understanding of GST obligations, which he explained. No evidence established that he was wrong. Mr Beames' evidence established that Diamond World complied with its GST obligations, which Fine Star clearly also sought to do.
That Mr Rad expected, and Mr Chohaili took steps to ensure that what Empire SER was paid for the consigned stock after the robbery included GST was understandable.
That how the payments made were dealt with in the invoices issued was not irrational, reflecting as they did sales earlier made by Diamond World for which it had not already paid Empire SER, as well as payments made for consigned stock which it was unable to return or sell after the robbery. The evidence does not establish that payments had been made for non-existent goods, despite how Mr Chohaili may have destroyed some of them. That could not relieve Diamond World of its obligations to Empire SER.
This aspect of the evidence thus supports the conclusion I have reached, that Mr Chohaili's evidence was generally credible and reliable, as do the conclusions which I have reached about the other evidence, to which I will now turn.

[20]

Mr Crofton

There were various issues about Mr Crofton's evidence.
On 5 December 2017 Diamond World was advised of Mr Crofton's retainer to assess the loss it had suffered. The insurer never advised of the assessment he arrived at, despite Mr Crofton confirming in cross-examination that the information he had received, enabled him to make that assessment. Nor did it ever advise that his retainer had been terminated.
Not explained by Mr Crofton's evidence, or otherwise, was why his affidavit dealt only with his involvement in the claim up until he made his second report to the insurer in February 2018, despite his ongoing involvement, which was established by his cross examination. He was not asked any questions in re-examination, but in final submissions an application was foreshadowed, but not finally made, to lead further evidence about whether Mr Crofton had completed his assessment of the claim.
The proper inference to be drawn from the unexplained failure to lead evidence in chief from Mr Crofton about his involvement in the assessment of the claim after his second report, which was relevant to various matters in issue, including whether the insurer had adhered to the obligations which it owed Diamond World when assessing its claim, is that Mr Crofton's evidence on those matters would not have assisted the insurer's case: Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8.
Annexed to Mr Crofton's affidavit were some file notes. In cross examination he explained his inevitable practice of making such notes of all his meetings and discussions, other than when speaking on the phone in his car. Not annexed were notes of various discussions which were in issue, including for example, that of his meeting with Mr Chohaili and Mr Leigh on 6 December, which on his evidence he had made. There was no explanation for the absence of the file notes, other than while he accepted that they were relevant, at the time of compiling the affidavit, they didn't appear to be.
That does not explain the absence of Mr Crofton's contemporaneous notes, with the result that the proper inference to be drawn from the insurer's failure to tender them, is also that they would not have assisted its case.
Mr Crofton gave an account of what Mr Chohaili told him in the first 6 December meeting, which Mr Chohaili disagreed with. But Mr Crofton agreed that he had had only limited involvement in his discussions with Mr Leigh, as was Mr Chohaili's evidence. There was, however, no issue that Mr Crofton was then told that the robbers had dropped some items of jewellery as they escaped.
Pertinently, in cross examination Mr Crofton agreed that no-one had ever told him that all the rest of the jewellery in the smashed cabinets had been stolen. He explained that was the assumption on which he proceeded from 6 December, until he saw the police photographs, by which time Mr Chohaili had melted the jewellery, despite the 20 December advice of the claim about damaged stock and his earlier telephone discussion with Mr Leigh about that stock.
I am satisfied that the evidence did not provide a proper basis for Mr Crofton's assumption.
That conclusion was supported by evidence Mr Crofton volunteered in cross examination, which was also not contained in his affidavit.
On Mr Chohaili's evidence it was on 7 December that he, Mr Leigh and Mr Pal met at the shop and weighed all the jewellery. He then also showed Mr Leigh two small baskets containing samples of the damaged stock taken from the smashed cabinets and asked him what Mr Crofton wanted done with it. After Mr Leigh telephoned Mr Crofton, Mr Leigh advised him that: "Mr Leigh: He doesn't want the damaged stock. Me: Ok, how are we going to value it? Can we value it by weight? Mr Leigh: Yes Me: That will be by weight and melting value. Mr Leigh: Yes that's ok."
Mr Crofton denied having had such a conversation, as does a later document from Mr Leigh, but Mr Crofton's 7 December file note supports Mr Chohaili's account.
When asked if he had told Mr Chohaili or Mr Leigh to photograph the jewellery that was dropped, Mr Crofton said that he had asked Mr Leigh to "take a photograph of all stock not stolen". He did not explain when he made that request, nor was its making supported by any file note. When further questioned Mr Crofton said: "Q. Wouldn't the idea of whether the stock that was damaged or dropped be photographed be relevant to that fact in issue? A. Yes. Q. But you don't include that in your affidavit now, do you? A. No. Q. Can I put to you that you don't have a recollection of that event and that's just something that you think might have happened but you don't actually recall it? A. No, I do recall asking Mr Lee for him to take photographs of all stock that remained. In fact, he stayed; we arranged for him to stay with Mr Chohaili after our meeting just to complete that. Q. You don't say in your affidavit that you told Mr Lee "Can you make sure you put all the damaged stock in a safe place for me to come and inspect at a later point in time", do you? A. No"
This evidence was contrary to the insurer's case that Diamond World had not initially disclosed that stock had been left behind in the smashed cabinets, which only came to light when Mr Leigh saw the police photographs in February 2018.
Also contrary to this was that Mr Crofton's file note of his 7 December conversation with Mr Leigh referred to damaged stock. It included that Mr Leigh said "will separate" and "ID gold value". But no reference was there made to photographs, or that what was being discussed were the items of jewellery which the robbers had dropped.
Despite his 7 December file note and accepting that some items of jewellery had been dropped by the robbers had been damaged, in his first 12 December report to the insurer, Mr Crofton made no reference to any stock having been damaged. But consistent with Mr Chohaili's evidence about the 7 December discussion and the file note, the 20 December claim referred to damaged stock and advised the value of the melted gold. It did not there indicate that to be an estimate, but what was advised had to be understood in the context of a claim made after a robbery, which had left jewellery damaged and which was made at a time when the cost price of that jewellery could not yet be identified.
On Mr Chohaili's evidence what was being conveyed was his estimate of the value of the gold which would be recovered after the melt, given the cost of refining it. In cross examination, it was put to Mr Chohaili that the claim in relation to the damaged stock later increased substantially from $48,000 to $397,000. His response, that this confused the cost price of the jewellery later established by reference to the records, with his initial estimate of what the insurer had to be credited for the value of the gold when melted, should be accepted.
Mr Crofton said in cross examination that he did not understand what was meant by the advice given on 20 December about damaged stock, nor he believed did Mr Leigh. And yet Mr Crofton said that he asked no-one any questions about this aspect of the claim. Nor did the insurer call Mr Leigh to corroborate his evidence, or dispute that given by Mr Chohaili.
The 7 December file note made it difficult to accept Mr Crofton's claimed lack of understanding that the 20 December advice was giving notice of a claim in relation to stock damaged in the robbery and its anticipated melt price, to which reference was there made, the value for which the insurer would have to be given credit. A basis for an understanding that the value of gold there dealt with related to some items of dropped jewellery, is not apparent.
Mr Crofton claimed that it was because he was not initially told that there had been stock remaining in the smashed cabinets which had been damaged, that when reference was later made to damaged stock, he understood that it was the items of jewellery that the robbers had dropped, which was being referred to. But that was also not consistent with his 7 December note.
Mr Crofton also said that if he had understood that there was other jewellery left behind which had been damaged, he would have asked to see it. That evidence has to be understood in a context where he agreed that he had never asked to see either the jewellery which the robbers dropped, or the other jewellery kept in the office, which he had also not seen and whose existence had been disclosed in the December advice.
Had Mr Crofton enquired about the December advice about the claim in relation to damaged stock, if he truly did not understand it, Mr Chohaili would have been able to provide an explanation, even if Mr Leigh could not. Why Mr Crofton did not then seek one is inexplicable and does not appear to accord with the insurer's obligations, which include seeking relevant information in order to resolve conflicting bodies of material: Finch v Telstra Super Pty Ltd (2010) 242 CLR 254; [2010] HCA 36. But an explanation was later given, when the disagreement over melting the gold emerged, the advice given by Mr Leigh.
Had an explanation been sought when the December advice was given, Mr Chohaili could then have shown Mr Crofton the jewellery, which was not melted until February or March 2018. That would have not only established beyond argument what jewellery had been left behind, which the police photographs depicted, but what of it had been damaged. That would also have revealed the disagreement which only emerged after the jewellery had been melted, about how the value of the damaged stock for which the insurer had to be given credit, was to be established.
True it is that it was for Diamond World to substantiate its claim. Mr Chohaili's concession established that the claim in relation to the damaged stock was not substantiated. Consistent with this, it must be accepted that he would not have sought to mislead Mr Crofton, had he asked about the reference in the 20 December advice to damaged stock and its melt price, which he did not understand. It seems that another likely result of such an inquiry would have been that Mr Chohaili's irrational decision to melt the undamaged stock, would then have come to light and not have been pursued.
As it transpired, the enquiry was not made, all that stock was melted and a claim for undamaged stock was erroneously pursued.
After receiving the December claim and having spoken to police, Mr Crofton pursued lists of stock and according to his notes, Mr Leigh explained why lists were not available. In February 2018 they discussed lists of stock on hand in June and December 2017, as well as consignment notes and later, purchases and sales in that period.
It was after he saw the police photos on 23 February that Mr Leigh advised Mr Crofton that he was surprised by the large quantities of jewellery there shown to have been left behind and embarrassed that there had been an error in his 23 January 2018 submission, that those items had been stolen. Mr Crofton's note of that conversation was that Mr Leigh had then advised that stock worth $1.4million had been stolen. Other documents from Mr Maher establish that he did not understand that not all the stock had been stolen, but he complained about how he had been left out of the dealings between his client and the insurer.
By the time Mr Crofton asked where the stock which had been left behind in the cabinets was, it had been melted. It was after this that Mr Crofton inspected the police photos and sought the information later provided in SS1. Mr Crofton then advised Diamond World that it needed to provide an itemised list of stolen stock, which could be produced by reference to the police photographs. He was cross examined about what he then said: "Q. The position then is that you identify in the last paragraph of 243 of your email, "We simply need the insured to provide an itemised list of stolen stock. This can be done with reference to photographs. The photographs are very clear and show the entire showcases." Do you see that? A. Yes. Q. And by the photographs, you mean the photographs of the New South Wales police showing the damaged stock. Correct? A. Yes. Q. And the process was look at the photographs, tell us what stock was there that's damaged, and we can take that off to work out what was remaining and therefore the stolen stock. Correct? A. Well, no. The process was to list the stolen stock. Q. Was the process to get a list of the stolen stock? Yes? A. Yes. Q. Get a list of the damaged stock? A. Yes. Q. Take that off the inventory in the documents you already had? Yes? A. Yes. Q. That would leave a situation whereby you could take away from the total stock the undamaged stock left behind. Yes? A. Yes. Q. And the damaged stock that was shown in the photographs. Yes? A. Yes. Q. And that would give you the stolen stock. Yes? A. Yes. Q. And in your years of experience that would be sufficient for you to form a view about the claim being put forward by Diamond World for you to make the assessment as to the loss. Correct? A. Yes."
It is also relevant that in Mr Crofton's second report in February 2018, while no reference was made to "damaged stock", he advised the insurer that there had been a post loss stock take in his presence. It had identified stock on hand in June 2017, that purchased since, as well as a "post loss of $411,241.40 at cost", of items remaining in store, as well as stock unaffected by the robbery in the office.
Mr Crofton also there noted that Diamond World had requested a payment on account of $500,000, which he recommended, given that it was clear that its loss had been significant. He also advised that the insurer's reserve should be amended to $1,700,000 for the stock.
Mr Crofton agreed that despite his ongoing involvement thereafter, his affidavit did not deal with what then happened, nor his final assessment of the claim. He was not re-examined and neither his final assessment nor any file notes were tendered. No-one other than Mr Ehlers was called to explain what happened after Mr Crofton's second report, the insurer relying only on documents.
There was thus an issue as to what inference should be drawn in the result, the insurer's final decision only being evidenced by the advice given by its solicitor on 3 October 2019, which made no reference to Mr Crofton's assessment.
The statement made by senior counsel for the insurer, when the application made in final submissions to lead further evidence about whether Mr Crofton had provided a further report was not pressed, was that "I can tell your Honour, as a barrister in practice now for more than 30 years, we don't have any such report".
Despite this, on what is in evidence there were two possibilities. Either Mr Crofton made a final assessment which was not disclosed to Diamond World or put into evidence, or the insurer withdrew his instructions to assess the claim, without notifying Diamond World of that decision, or disclosing it in these proceedings.
The former is contrary to Mr Crofton's evidence about his ongoing involvement. If the latter was a part of the process which the insurer pursued, withdrawing Mr Crofton's instructions to assess the claim, without disclosing that decision to Diamond World, it having provided him with sufficient information to make his assessment, that would not have been reasonable.
It follows that the inference necessary again to be drawn is that evidence which disclosed what the insurer did in relation to Mr Crofton's retainer to assess the claim, or Mr Crofton's final assessment, if he made one, would also not have assisted the insurer's case.

[21]

Mr Leigh

Neither party called evidence from Mr Leigh, in the insurer's case, despite having interviewed him. It rather relied on documents he had produced to advance its defence, with the result that he could not be cross examined either on those documents, or about other issues on which his evidence could shed light.
The documents shed some light on issues such as the disputed disclosure that stock had been damaged in the robbery; what had been discussed between Mr Leigh and Mr Crofton about melting such jewellery; and Diamond World's adherence to its contractual obligations.
Why Mr Leigh was not called by Diamond World was revealed by his conduct, contrary as it was to its interests. Why he was not called by the insurer was said to be explained by the documents on which it relied. They well established why he was not called by Diamond World, but not why the insurer did not call him.
Mr Crofton was plainly mistaken in proceeding as he did on the assumption that no stock had been damaged, other than the dropped jewellery, despite his 7 December discussion with Mr Leigh and the December 2017 advice of the claim. Even when the police photographs came to light in February 2018, his mistaken assumption was not revealed to Diamond World.
Instead, Mr Leigh communicated direct with the insurer in terms to the considerable disadvantage of Diamond World, after Mr Crofton advised him that he was also obtaining a copy of the police photographs and asked him to confirm the accuracy of the claim, noting that $1,681,835.70 had been claimed for stolen jewellery. On the evidence Mr Leigh appears then to have acted in accordance with what he perceived his own interests to be, rather than those of Diamond World.
Mr Leigh told Mr Crofton by email: "Obviously having seen the coloured photographs obtained by the Police Scene of Crimes Officer (SOCO) shortly after the robbery we need to know what happened to the Jewellery in the 6 x display cabinets for which Insured has claimed were stolen. We were both present at the first meeting the morning after the robbery and the display cabinets had been emptied and cleaned possibly of blood and the glass replaced temporarily with timber. At no time did Khosrow Chohaili mention or Indicate to me that there was any Items not stolen from the cabinets. Sziba Chohaili was unable to answer any questions when I revisited to again question her to establish what jewellery was in what cabinets. Khosrow stated she had a nervous breakdown and could not answer questions. Sziba was present on this second occasion but continued to cry while I was there. Insured maintained they do not have a stock control book with individual jewellery items entered and with the cooperation of the insured's CPA Accountant we presented a claim based on reconciliation. At no time did Khosrow mention or Indicate that any jewellery in cabinets 1 to 6 had not been stolen. I believe that we should interview Khosrow together when Police hand over the coloured photographs depicting the large quantity of items not stolen. He perhaps was unaware that photographs were taken by the Police. I believe his only argument will be that the jewellery was contaminated by blood but that still does not excuse him from hiding the whereabouts of the items which could have been hygienically cleaned and then deducted from the adjusted value of goods. It does Appear that the Police have another agenda re this matter and re the arrested robbers ?? We really need the photographs to confront Khosrow and I await with bated breath as to what his explanation is going to be. I spoke to Alex Thornton last night and suggested that there should be no communication regarding this matter to Stewart Maher other than to state Underwriter is awaiting a Police Report . It is obvious Alex knows the circumstances of the investigation to date and will not tell Maher anything."
The insurer's case was that it had had prior dealings with Mr Leigh and a high regard for both he and Mr Crofton. But Mr Crofton denied having agreed with the course which Mr Leigh so proposed.
As Mr Crofton accepted in cross examination, aspects of Mr Leigh's email were known to be incorrect. They knew from the outset that not all stock in the smashed cabinets had been stolen, some of the jewellery having been dropped and Mr Crofton accepted, damaged as a result. They had discussed damaged stock on 7 December and its value and the 20 December claim had also dealt with damaged stock and an estimate of the expected value of the melted gold had there been given.
Consistent with this the only reasonable inference available from what the police photos showed, was that some of the jewellery had indeed been damaged. But they also left open the possibility that some of it had not been.
In the result, the insurer relying as it did on Mr Leigh's documents and yet having not called him to give evidence relevant to various matters in issue, the proper inference again is that his evidence would not have assisted its case.
In all those circumstances, I was satisfied that Mr Chohaili's evidence that he had shown Mr Leigh samples of the damaged jewellery before it was melted, with the result his 7 December conversation with Mr Leigh, from which he understood the damaged jewellery was to be melted, had to be accepted.

[24]

The parties' obligations to each other

There is no issue that the parties' insurance contract is one based on utmost good faith. Implied into the contract is thus the requirement that both parties act toward each other with the utmost good faith: s 13(1) of the Insurance Contracts Act.
In TAL Life it was explained that this concept of utmost good faith "encompasses notions of fairness, reasonableness and community standards of decency and fair dealing, and may be breached by capricious or unreasonable conduct which falls short of dishonesty": at [49]. It could also plainly be breached by dishonesty, but fraud is a different matter, as I have explained.
I am satisfied, as I have explained, that Diamond World's pursuit of the claim in relation to the undamaged stock breached this obligation, unreasonable as that was, given Mr Chohaili's irrational decision.
In Edwards v Hunter Valley Co-op Dairy Co Ltd (1992) 7 ANZ Ins Cas 61-113 it was explained that an insurer is also under a duty of good faith and fair dealing, which require it to have due regard for the interests of the claimant. Because reasonable people can reasonably take different views, however, "unless the view taken by the insurer can be shown to have been unreasonable on the material then before the insurer, the decision of the insurer cannot be successfully attacked on this ground": at 77,536.
In Hannover Life Re of Australasia v Jones [2017] NSWCA 233 it was confirmed that an insurer's duty of utmost good faith in dealing with a claim is independent of the implied term to act reasonably. "Further, the duty of utmost good faith is broader than the implied term to act reasonably because the former duty applies to all aspects of the claim handling process": at [71].
An insurer is thus not entitled to refuse a claim for a reason which depends on the efficacy of an opinion in relation to the formation of which it has not acted reasonably and fairly, or which does not address the correct question. And if the insurer does form and rely on such an opinion, that will constitute a breach of its contractual obligations. But the Court may not simply substitute its own view for that of the insurer, because it is performing a reviewing function in proceedings such as this: at [86].
Thus, it is also not for the Court to undertake a review of the merits of the insurer's decision, or to substitute its own view for that of the insurer, by reference to additional material not before the insurer: Hannover Life Re of Australasia Ltd v Sayseng (2005) 13 ANZ Ins Cas 90-123; [2005] NSWCA 214 at [54].
In MetLife Insurance Ltd v Hellessey [2018] NSWCA 307 it was held that "a decision may be set aside if the process of consideration underlying it was not undertaken reasonably and fairly, even if the outcome itself is not also shown to have been unreasonable on the material before the insurer." That is because more than one reasonable process of consideration may be open in the circumstances, but the process adopted will "not cease to be unreasonable simply because another, and reasonable, process to the same conclusion happened to exist": at [8].
In Newling v FSS Trustee Corporation (No 2) [2018] NSWSC 1405 Parker J observed that it is thus an "essential first stage of the plaintiff's case to demonstrate, by reference to the material before the insurer, that the insurer's decision to decline the claim miscarried": at [226]. Further, that when an insurer "fails to act fairly and reasonably the ensuing decision is of no contractual effect": at [227]. In such a case it is for the Court to decide the contractual issue for itself: at [229].
In addition, a breach of the duty of good faith and fair dealing which results in the refusal of a claim, can also result in an award of damages flowing from the breach: at [228]. In such a case if it is found "that the decision breached the insurer's obligation of fairness and reasonableness, the Court must determine what the decision would have been had the insurer acted fairly and reasonably. If the Court finds that in that event the claim would have been allowed, then damages can be recovered for the value of the claim": at [232].
One of the difficulties in this case for the insurer resisting Diamond World's claims was its failure to reveal various of the material which was before it, when it made its decision. I have already discussed the problems with Mr Crofton's evidence and the questions which it raised. On that and other evidence which I will discuss, I am satisfied that Diamond World has established that the insurer breached its duty of utmost good faith, given both how it handled the claim and what it failed to disclose.
The evidence also establishes both that the insurer did not act fairly and reasonably in arriving at its decision and that its decision would have been different, had it not breached its duty.

[25]

The insurer's actions

It was in April 2018 that Diamond World's solicitors provided its claim, explaining how the $355,718 for damaged stock had been arrived at, that taking into account its cost price, as well as a credit for the melted gold and loose stones. The claim for stolen stock was for $1,302,801, less the value of jewellery which police might return.
It was in May 2018 that the insurer claimed that Diamond World had initially represented that all jewellery in the smashed cabinets had been stolen, but as I have explained, that was not what the evidence establishes.
It also then explained its view that melting down the stock had been unreasonable, at odds with good business practice and potentially inconsistent with Diamond World's obligation to act in utmost good faith. Given what the police photos depicted and the irrational pursuit of a claim for the undamaged stock which had been melted, it must be accepted that there was a basis for those concerns in relation to the undamaged stock.
The insurer then requested an itemised inventory of all the melted stock, by reference to the police photographs. As to the claimed misrepresentation that all of the stock had been stolen, the insurer advised: "MISREPRESENTATION OF LOSS 7. In your letter, you deny that your client made any misleading representations to the effect that all jewellery stock items in certain display cases were stolen during the robbery incident, and suggest that both Mr Crofton of McLarens and Mr Leigh were mistaken. 8. We do not accept this. Both Mr Leigh and Mr Crofton are experienced professionals of several decades' standing in the industry, with whom we have worked on many occasions and in whom we have every confidence. Both clearly understood that all, or at least the vast majority, of stock in the showcases had been stolen based on your client's conduct. 9. We understand the police also formed this impression, which is why your client was later confronted with the police photographs. 10. Your client also alleges the remaining stock that was allegedly melted down was contaminated with quantities of blood or otherwise damaged as a result of the robbery. We observe that the police photographs do not appear to show any noticeable quantities of blood, and most of the remaining stock does not appear to be damaged in any way. 11. Regardless of whether this representation was deliberate, your client's conduct has resulted in a material misunderstanding as to how much stock remained in the showcases after the robbery, which has in turn resulted in prejudice to Underwriters. DIRECTION TO MELT DOWN REMAINING STOCK 12. According to your letter, your client "relies on a conversation that it understood had taken place between Mr Leigh and Mr Crofton", and the fact that Underwriters did not query the damaged stock (which, due to the above, Underwriters were not aware existed) to support his claim that he was authorised to melt down the stock. 13. Both Mr Leigh and Mr Crofton refute this claim. We cannot emphasise enough that this is not a course of action that would have ever been authorised. Your client's alleged misunderstanding, even if genuine, does not absolve it of responsibility for prejudice caused as a result".
Mr Crofton's evidence was that initially he wrongly proceeded on his assumption that all of the stock from the smashed cabinets had been stolen, apart from the dropped items of jewellery, despite what he discussed with Mr Leigh and what had been communicated to him in writing in December about damaged stock. Clearly the police cannot ever have had that impression, given what they saw at the shop, which was established by their photographs.
As I have explained Mr Chohaili's evidence about Mr Leigh's advice about how the value of the damaged jewellery for which the insurer had to be given credit was to be established, must also be accepted. That Mr Crofton did not pursue what he claimed not to have understood about the damaged stock dealt with in the December 2017 advice, helps establish the breach of the insurer's obligations, as does the fact that despite its May 2019 communication of its first decision, it made no payment to Diamond World, even for damaged fittings.
In July 2018 SS1 had been provided to Mr Crofton and the insurer. It cross referenced the jewellery in the police photos with identified records, including purchase invoices, consignment notes and daily sale sheets, which were also provided.
It may be accepted, as the insurer submitted, that it was reasonable for the insurer to have appointed Mr Crofton and to rely on his opinions and assessments. That is why its failure to lead evidence about what he did after he provided his second report to the insurer leads to an adverse inference against it. But it also had to consider the records and information on which Diamond World relied to substantiate its claims. It thus could not ignore errors into which Mr Crofton or others on whom it relied fell, when they were drawn to its attention, as they were.
The insurer sought further information in September 2018, to which a detailed response was provided in October, as well as revised spreadsheets. After a meeting in February 2019 various other photographs were provided, including of the gold melt, which resulted in further requests for information, including a photograph file, because of their quality, as well as Mr Chohaili's police statement.
While the times at which these photographs and other information was provided were criticised as not having been consistent with the contractual obligation to provide all information, as I have already explained, there was no such obligation. I am well satisfied that Diamond World was responsive to the requests made of it and explained why some information which was sought, could not be provided. The problem was its pursuit of the claim in relation to damaged stock, which the insurer rejected, not the information which it provided in response to requests the insurer made.
Consistent with this, it was on 31 May 2019 that the insurer accepted liability in relation to the stolen stock and damaged fittings and invited discussions to arrive at a resolution of the claim.
It was in July 2019 that the insurer received Mr Ehlers report, his conclusion being that the finally claimed losses was for $1,705,360, of which $1,313,360 was for stolen stock and $392,022 for damaged stock. He arrived at a maximum figure for the claim of $710,234, but his report was erroneous, beginning as it did with the assumption that there had been no stocktake undertaken in June 2017.
That had long been in the insurer's hands and its failure to provide that very pertinent information, also evidenced the breach of its obligations.
This report was provided to Diamond World in July 2019, when the insurer's solicitors advised that it had concluded that Diamond World was not entitled to recover any amount for melted stock, in part because jewellery can be remade and does not lose its value once stones are removed and it is melted. Mr Chohaili and Mr Crofton agreed what the cost price of jewellery is comprised of. It includes the cost of manufacture. The insurer paid no attention to this or the differing value which can result, depending how jewellery is manufactured. This approach was thus not only plainly wrong, but unreasonable.
Still further information was then sought, in the event that a payment of $326,920 was not accepted on a without admission basis. That was explained that this had been calculated by: "(a) $318,320 for jewellery (being $710,342 less $392,022 of melted stock); plus (b) $9,600 for property damage repairs; less (c) $1,000, being DWJ's Policy excess."
The offer reflected views Mr Ehlers had reached and was not accepted. Advice of Mr Ehlers' errors was given, and further information was provided in August, when a further version of SS1 was provided and an invitation to meet was accepted.
Curiously, the insurer's case in written submissions was finally that its decision was comprised of prolonged discussions, as well as its solicitor's letters of 18 July, 8 August, 3 October and Diamond World's response. That differed from how the case was opened and can in any event, not be accepted.
The evidence establishes a decision made in two parts. The first conveyed by its 31 May letter the insurer sent and the second conveyed by its solicitors in their 3 October letter, which reiterated concerns earlier explained. I accept that there does appear to have been a problem with the second decision, failing as it did to reveal to Diamond World the loss the insurer had assessed it suffered. That information was only later provided in the defence and was even later increased in the amended defence.
That the obligation to provide reasons of the kind discussed in MetLife Insurance Limited v MX [2019] NSWCA 228 at [154] was thereby met is not apparent. I consider that those reasons, as a minimum, had to disclose the loss assessed. That alone is not determinative of what here arises to be resolved, but what the insurer conveyed also has evidentiary significance as to whether its process of consideration of Diamond World's claim was undertaken fairly and reasonably: at [155].
Because of the way the insurer made and conveyed its decisions and the way it conducted its case, it is difficult both to identify what material was taken into account and how the insurer reached its adverse conclusions. That supports the conclusions which I have reached, in relation to the breach of the insurer's obligations.
On 3 October what was offered, on which the insurer relied to resist the making of any orders against it was: "26. Notwithstanding Underwriters' concerns, Underwriters are willing to pay DWJ $500,000 in full and final settlement of its claim first made on or about 20 December 2017 for about $1.7 million for stolen jewellery stock and repair costs on a without admission of liability basis. 27. The Settlement Sum is calculated based on the loss that DWJ has substantiated (as outlined in Our Letter) and an estimate of unrecoverable costs that Underwriters will incur if DWJ commences proceedings against Underwriters. 28. The Offer is conditional on the following: (a) DWJ entering into a deed of settlement, satisfactory to Underwriters, that, amongst other things, will contain a full release and warranty from DWJ that payment of the Settlement Sum will constitute full and final settlement of the Claim, and/or all claims DWJ has, had or may have against Underwriters arising directly or indirectly out of the armed robbery that occurred at DWJ's premises at approximately 4.45pm on 4 December 2017; and (b) that, if ultimately, for any reason, Underwriters are found by a Court to have no liability under the Policy (Being the Jewellers Block and Multi-Perils Insurance Policy (policy number JB013G1011-16) issued to DWJ through Quantum Underwriting and underwritten by Certain Underwriters at Lloyd's) then DWJ will be liable to repay the Settlement Sum into Lander & Rogers trust account within 7 days of that decision being made. 29. The Offer is made pursuant to the principles applied in Calderbank v Calderbank [1975] 3 All ER 333, and Underwriters reserve the right to rely on this letter on the question of costs if the Offer is not accepted. 30. This Offer is open for acceptance until 5.00pm on 11 October 2019, at which time it will lapse."
That conditional offer was not accepted, attention then being drawn by Diamond World's solicitors to repeated "misconceptions and mischaracterisation" of the documentary and other evidence the insurer had been provided. A counteroffer of $1,300,000 was made. But also not accepted.
In the result I am satisfied that the evidence establishes that the obligation of utmost good faith required the insurer to do more than it did.
It should have disclosed what it took into account in arriving at its decision, including Ms Bramble's report and whatever the position was in relation to Mr Crofton's assessment. Further, having accepted as it did that Diamond World had substantiated part of its claim, it should have paid Diamond World that amount, whatever it was.

[27]

Was the insurer relieved of the consequences of its breach of its obligations?

I am also satisfied that the irrational pursuit of the claim in respect of jewellery not damaged in the robbery but destroyed by Mr Chohaili as it was, cannot relieve the insurer of the consequences of the breach of its obligations.
The absence of claimed fraud was again of particular significance. Unlike in the case of fraud, under this statutory scheme a failure by an insured to act without the utmost good faith in making or pursuing a claim, does not entitle the insurer to refuse to pay the claim.
In such a case, if an insurer accepts that the insured has substantiated an insured loss, despite not having acted with the utmost good faith, unless excused from making the payment due by the insurance contract itself, a failure to make that payment will involve, on the insurer's part, a breach of the insurance contract. There was no such contractual provision in this case.
It will be remembered that the amended defence sought to achieve this result by pleading: "19. In further answer to the whole of the claim made by the plaintiff, the defendant says: (a) any claim based upon a breach by the defendant of the contract of insurance; and (b) any claim for damages over and above the assessment of the loss made by the defendant; must fail because the plaintiff has not approached the matter in good faith and has presented a claim which is not a true reflection of its entitlement under the policy. Particulars (a) During the period of the assessment of the claim the plaintiff failed to respond fully and promptly to reasonable requests for information made by the defendant; (b) The plaintiff has claimed the loss or destruction of items of jewellery which, upon the basis of the records of the plaintiff and third parties supplied to the defendant, cannot be established to have been taken during the robbery or damaged as a result of the robbery; (c) In response to the defendant's request that it properly prove its claim, the plaintiff has: (i) failed to produce records verifying the consignment of jewellery kept on the subject premises and taken in the robbery; (ii) produced records which neither conform with proper accounting processes or provide a proper means of recording stock, sales and purchases; (iii) produced and relied upon records which do not appear to be an accurate record of the jewellery on the premises as at the date of the robbery. (d) The plaintiff has purported to support the claims by relying upon representations and providing written statements which do not accurately reflect the loss and damage suffered through the robbery; (e) The plaintiff has undertaken measures in respect of unnecessarily dismantling and melting jewellery settings which had the effect of artificially enlarging the potential claim."
A basis for the claim that not approaching the matter in good faith, or presenting a claim which was not a true reflection of its entitlement under the policy, would relieve the insurer of the contractual obligation to pay for any losses which were substantiated, has not been established.
I have already discussed the other provisions of the contract. Under cl 5, which was not pleaded, the insurer was entitled to void the contract if Diamond World had fraudulently concealed or misrepresented any material fact or circumstance and further, to avoid a claim if it was made knowing it to be false or fraudulent. This clause was not relied on when the claim was refused, nor was either fraud or cl 5 pleaded in the amended defence.
Even if cl 5 been pleaded, Mr Chohaili's concessions about the undamaged stock in the circumstances I have explained and the result, that the claim in relation to that stock is no longer pressed by Diamond World, does not establish that the claim in relation to the undamaged stock, while undoubtedly entirely mistaken, was fraudulently or falsely made or pursued.
In May 2019 the insurer accepted its liability in respect of some of the stolen stock, which it later quantified by its pleaded admission. How it arrived at that conclusion was not explained. But I am satisfied that all of the information it had to consider at the time it made its decision, which included both Mr Ehlers' first report and the advice of the errors which it contained and the material which revealed those errors, established that a greater loss than it accepted had been substantiated.
How the claim was pursued did not relieve it of the obligation to pay what had been substantiated.

[31]

The records established the cost price of the stolen stock

SS1 included a description of each piece of jewellery, diamond weight in carats, price paid for the stock, or the consignment price and the source of the jewellery and identified which jewellery had been recovered by police, in order to arrive at a final value of what had been stolen or damaged. Diamond World owned 4 of the 8 items recovered by police, about which Mr Chohaili provided further information to the insurer.
The spread sheets were also later amended by addition of two further columns of information. The result was a claim for $1,307,597.02 for what had been stolen.
Given what was in issue, in engaging Mr Ehlers to assist it, the insurer acted in accordance with its obligations. But it had to take care to ensure that he was adequately briefed with the records and information that Diamond World had provided, as well as with the further information which it had sought and obtained.
Ms Bramble's May 2019 report and Mr Crofton's final assessment, if he made one, were not disclosed to Diamond World. If Mr Ehlers had them to consider when he provided his first report is not clear. If he did have Ms Bramble's report, there would have been some difficulty.
Ms Bramble's report quoted from information which Mr Chohaili provided about Diamond World's business and the records it maintained, as well as information obtained from Mr Rad of Empire SER in three meetings, to substantiate its supply of consigned goods, as well as documents which he supplied. This would also have been relevant to Mr Ehlers' investigation.
But the report also contained pertinent inaccuracies, which would have been apparent to Mr Crofton, if he was provided Ms Bramble's report and to the insurer, if it had considered the material Diamond World had provided, as it had to. For example, that it was in April 2018 after a claim review commenced, that the police photographs were first obtained; it was only then that it was learned that a substantial amount of jewellery had been left behind and later melted; that while inquiries, reconciliations and audits had been ongoing, this jewellery had not been reconciled to an invoice; and that no itemised list of the jewellery had been provided.
Mr Ehlers' first report was provided to assist the insurer with "evaluating the minimum total value of the supported loss". Despite this the maximum loss he then estimated was $710,324, which included damaged/melted stock of $392,022, his estimate of the "likely stock level" being $1,306,868 at the time of the robbery.
The July 2017 stocktake, which had long been in the insurer's hands, established the actual stock then held, to which Mr Chohaili had made reference in producing SS1. There the cost price of each item of stolen and damaged stock which remained in its hands at the time of the robbery and had been either stolen or left behind in the smashed cabinets, was specified and further information was included in the revised versions.
Mr Ehlers explained in his first report challenges presented in reconciling the information which he was provided to consider. Part of his then problem was that the records kept did not include a stock identification number for each item, but rather a simple physical description. If the Bramble's report had been provided to Mr Ehlers, it would have compounded his difficulties and if the decisionmaker had relied on these reports, he, she or they could also have been misled, especially if proper account was not taken of the information Diamond World had provided.
Whatever the position was in that regard, when problems with what Mr Ehlers understood and what he had concluded were drawn to the insurer's attention by Diamond World, they also had to be considered, when making its decision about whether the claim had been substantiated. In making that decision it had to consider all of the information relied on to substantiate its claim, including its advice that Mr Ehlers had made errors.
I have discussed the problems with the reasons given for the decision. That did not reveal what of the myriad of material it had to consider, it took into account in reaching its adverse conclusion.
Mr Ehlers had explained his reservations about Empire SER stock. The consignment notes established that they went into the store, but he considered that there could be no certainty that a particular item was or was not in the store at the time of the robbery, although there was no evidence that any consigned stock had been returned. But the records also disclosed what had been sold, which was also part of the analysis reflected in SS1.
Mr Ehlers also explained in his first report the type of further documentation, apart from consignment notes and tax invoices, which he would expect to see, given the value of the goods being dealt with. But such records were simply not kept.
It followed that the insurer's decision about whether Diamond World had substantiated its claim had to be made on the records which did exist, together with the analysis and explanations it had variously been given of what those records showed, given the way in which the business was operated.
Mr Chohaili, Mr Pal and Mr Rad had also all been interviewed by the insurer. What they then said was also not in evidence, but it may be inferred that it accorded with the evidence Mr Chohaili and Mr Rad gave and what resulted from Mr Beame's examination. If it did not, no doubt the information which had been obtained from them would have been tendered by the insurer.
From Mr Chohaili and Mr Rad's evidence, they had known each other for very many years, over which they had not only dealt with each other in the jewellery business. They had successfully gone into property development ventures together. They plainly had a high level of trust in each other, given the way in which, and the prices for which, Empire SER sold and also consigned valuable jewellery to Diamond World for sale in its shop.
That there was a proper basis for the insurer concluding that the business records it had to consider did not accurately reflect their dealings with each other, may not be accepted. That conclusion also applies to the final sales invoice Empire SER issued in 2020, after the insurer's decision, but which was also attacked. It dealt with when Diamond World finally paid for what remained outstanding in respect of its consigned stock.
Even though not part of what the insurer had to consider, it is convenient here to deal with this.
After the robbery Diamond World was not in a position to return the consigned jewellery to Empire SER, it having either been stolen or melted, or to pay for it all. The insurer made no payment under the policy in respect of any part of the claim. Diamond World had to close its retail store. Mr Chohaili explained that Empire SER was initially paid some cash and later an agreed amount of diamonds, for the consigned jewellery, which could not be returned. The final payment was made by Fine Star, accounted for by loans it owed him and Mrs Chohaili.
Mr Chohaili's evidence that he felt obliged to make this payment must be accepted in the circumstances, as does his explanation of the way it was paid in instalments, given the cash flow problems he described.
Mr Rad's evidence corroborated that of Mr Chohaili. He explained the way his business operated and how it issued consignment notes, which indicated the GST payable on the cost price in the event of a sale; that he would not have accepted the return of damaged stock; and that after the robbery he expected payment from Diamond World, despite the consigned stock not having been sold. He also explained how the agreement in relation to part payment by cash and diamonds had been arrived at and that he had pursued payment, not knowing that Mr Chohaili had melted some of the jewellery.
Neither the robbery nor Mr Chohaili melting the jewellery can have relieved Diamond World of the obligation to pay for the consigned stock it was unable to return, for the cost prices which had been agreed with Empire SER.
I accept that Mr Rad's evidence thus also helped establish the reliability of the records in relation to consigned jewellery, about which Mr Ehlers had reservations.
The position was no different in the case of Fine Star.
The financial records established the cost price of purchased and consigned stock and Mr Chohaili's SS1 analysis, of what had been stolen or left behind in the smashed cabinets. Fine Star was Diamond World's major supplier and on the evidence it had successfully operated a retail business selling such goods, for decades.
Mr Crofton was the assessor engaged. His evidence was that he was aware that Diamond World did not maintain a "perpetual" inventory of stock it had purchased or held on consignment. It had no obligation to do so. He accepted that its records included invoices which reflected the price it had paid for stock purchased, as well as consignment notes which recorded the prices which had to be paid, if the goods were sold, including for GST, as well as sales information.
The exercise undertaken in relation to the SS1 spreadsheet, as Mr Crofton had required, by reference to Diamond World's paper records, which included the July 2017 stocktake, sought to provide information in a form which would have been available, had a "perpetual" inventory of stock been maintained. The information which the insurer thus had to consider as a result, did not reasonably permit it to conclude that Diamond World had not substantiated the cost price of any the stolen jewellery, despite the reservations Mr Ehlers expressed in his first report, he not having been adequately instructed about the information the insurer had to consider.
There was no issue about what stock the records established was in the store at the time of the July 2017 stocktake. While in the end the experts did not agree entirely about what those records established about the stock in the store at the time of the robbery, that does not undermine the conclusion that the records also established this.
Mr Ehlers remaining reservation was explained in the joint report to concern 11 identified consignment notes dating between August and November 2017 totalling $942,979.41 from Empire SER and Fine Star. He was concerned both about the absence of records which were not part of Diamond World's system, as well as with the records which were kept.
As I have explained, despite his reservations, what the insurer had to consider was not what did not exist, but what Diamond World relied on to substantiate its claim. The evidence established that on that material, there was no reasonable basis for the conclusion that Diamond World had not substantiated its claim in relation to the stolen stock.
The experts agreed that they had not concluded that the 11 transaction documents on which their differences rested were false, having had access to Mr Chohaili's evidentiary statements and that of Mr Rad, Empire SER's sole shareholder and director. It was Mr Chohaili and Mr Rad who had agreed two of the transactions about which the experts differed. It was Fine Star, of which Mr Chohaili was also general manager, with whom the other 9 consignment transactions had been entered.
The experts also agreed that given the physical inventory system which Diamond World operated, there was no way to be 100% certain about the exact items which had been sold or included in consignment notes and non-consignment inventory. This also reflected that Diamond World's daily sales register described items sold with narrations such as "diamond ring" or "bracelet". But the experts agreed that there was an extensive trading history between these entities. Their disagreement turned on whether further corroborative evidence was required to establish the veracity of the information reflected in the records.
Given how the records were kept and all of the information Diamond World had provided, including in interviews with Mr Chohaili and Mr Pal and that which the insurer had obtained by interviewing Mr Rad, that there was any basis, at the time it made its decision, for not accepting the business records on which Diamond World relied to establish the cost price of the consigned and purchased stock which was stolen, is not apparent. The further evidence received in these proceedings, in my view, puts this beyond argument.
The contract required Diamond World to prove its claim. It was not for the insurer to assemble such proof: Newling v FSS Trustee Corporation (No 2) at [148]. But having pursued the information it required, the insurer was obliged to fairly take it into account.
That included the explanations given by Mr Chohaili and Mr Rad in relation to their dealings, including how GST was treated. Nothing in the evidence establishes a reasonable basis for their explanations not having been accepted.
In the result I am satisfied that in not accepting, when it made its October 2019 decision, that Diamond World had substantiated the cost price of all of the stolen jewellery which it either owned or held on consignment, which the SS1 analysis of its records had established, the insurer not only acted unreasonably, but was in error.
In the result the orders sought in relation to the stolen stock must be made.

[32]

The stock damaged in the robbery

As I have explained, the police photographs established what had been left behind in the smashed cabinets. Other items had been dropped and damaged.
SS1 and the other records and documents later provided established the cost price of that jewellery. Mr Chohaili conceded that 30-40% of it had not been damaged. The cross examination included: "Q. But you've given evidence 30 minutes ago that a lot of the things that you put through the melt were not damaged, remember you said that? A. Part of them, yes. Q. Where are they listed? A. That's part of the damage, because we put - at that stage I put everything on a scale and I weighed it. Q. Whether it was damaged or not? A. That's correct"
He was not re-examined. It follows that neither SS1, on which the claim was based, nor the evidence in these proceedings sought to establish which pieces of jewellery, which it was claimed had all been damaged, was actually damaged and which was not. The contractual obligation fell on Diamond World to substantiate its claim. It did not do so.
Mr Chohaili said that some of the jewellery left behind was delicate and some of it was hollow. Much of the jewellery contained many small stones, some of it larger stones. Some of the jewellery was 18 carat gold, some 24. Some of it was much more valuable than other pieces. On all of the evidence it is thus impossible to determine what pieces of jewellery, either depicted in the photographs or dealt with in SS1, was damaged.
In the result it is not a matter simply of reducing the claim in relation to damaged jewellery by 30-40%. That could significantly over or underestimate the loss suffered
It was only stock stolen or damaged in the robbery for which Diamond World had a claim under the policy. Not having sought to establish which of the jewellery itemised in SS1 had been damaged and which had not and that not being established by Mr Chohaili's evidence, the cost price of the damaged jewellery is unknown.
The result, it must be accepted, that Diamond World has not substantiated its claim for jewellery damaged in the robbery.

[34]

What was recovered in the melt?

The insurer was entitled to have the value of gold and stones of damaged jewellery taken into account, by way of reduction of what it had to pay for the damaged stock, if they could be reused.
Whether what Diamond World advanced accurately reflected the value of the gold and diamonds which had to be taken into account, was also in issue, as was when the melt occurred. I am not satisfied that prior statements that the melt occurred on 18 March and Mr Chohaili's acceptance in cross examination that the melt must have been undertaken earlier and the gold also sent to the refiners earlier, given what documents showed, established that he was attempting to conceal something, as was also finally the insurer's case.
Mr Chohaili's evidence was that the cost price of the jewellery left behind was $397,183.37, established by invoices and consignment notes in evidence. The melted gold, mainly 18 and 24 carat gold and recovered stones were valued at $59,282.15. The gold was sold for $43,890.15 and the loose diamonds retained, they being worth $15,392.00. The gold recovered in 2018 as the result of the melt was thus more than the December 2017 estimate, given at a time which the cost price was still not known. Mr Chohaili was extensively cross examined about this.
Mr Chohaili's evidence was also that he still had all of the damaged and undamaged stones; he had never been asked to produce them; he had shown his lawyers pictures of them; he could still produce them; and that he had produced everything he had been required to produce. It later emerged during submissions that after his evidence he had produced diamonds to his lawyers, but there was no application to reopen the evidentiary case.
An analysis undertaken of SS1 was also submitted to establish that his evidence could not be accepted. The amount of diamonds, for example having been considerably understated, it referring to 143 carats of diamonds in total, but stones of only 10 - 15 carats recovered, even though three of the stones weighed 2.51, 1.21 and 1.12 carats. Still I am not satisfied about this.
I do not accept that his evidence was not honestly given. Mr Chohaili's evidence could have been challenged by expert evidence, but it was not. His evidence was both cogent and persuasive.
The analysis of SS1 did not seem to me to pay necessary regard to Mr Chohaili's evidence about what was comprised in the cost price of such jewellery, as Mr Crofton accepted. That does not include only metal and stones, with the result that its value is considerably reduced when damaged and even further reduced when melted. Further, that very small diamonds, which much of this jewellery contained, could not be reused after the melt. Mr Chohaili also explained what was involved in refining the metal recovered in the melt, including the significant cost of extracting platinum from gold, which he had thus not instructed the refiner to undertake and the loss of gold which resulted when such refining was undertaken.
In the result, I would have concluded that this aspect of Mr Chohaili's evidence should have been accepted, had I concluded that the claim in relation to damaged stock had been substantiated. In the result, the claim would have had to be reduced by 40%.

Diamond World Jewellers Pty Ltd v Catlin Australia Pty Ltd

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